....................The Smart Money Investor...................

Rising Negative Sediment Offers Opportunities

2005-12-08T06:19:00.000-08:00

Technical

Both the nasdaq composite and S&P500 have shown signs of weakness recently. This is expected given the meteoric rise of both indices. Now sediment has become more negative driving some investors to take profits. This action in turn has caused the indices to form a basing chart pattern. In this stage of the rally there is likely to be a shake out. We expect increasing volatility and opportunities to buy good stocks at better prices. That said, both indices have broken a steep up trend thus increasing risk above normal levels (to nasdaq 2219 and 1245 on the S&P500). We are carefully adding to positions and take some profits in others.

Change in Sediment

Over the last week I have noticed an increase in negative sediment. Granted, investors have been pretty bullish of late, however, there has been a more rapid decline in the number of investors who believe that the market will move higher this year. The reports out of Iraq threatening middle east oil supplies, cold weather in the northeast, higher commodity inflation and a report out of UCLA predicting the loss of 800,000 jobs in the housing industry have put a damper on the recent rally. But the smart money knows that business in the US is booming in many sectors. In our discussions with various managements we are finding increasingly positive outlook for business. Further, it is our belief that commodity and energy inflation are the result of growing business and not stagflation as evidenced by the sharp rise in productivity. Analysts are still raising earnings for many groups and mid-quarter reports from Texas Instruments and Qualcomm are backing them up. Another surprise is the home builders. They continue to have rising profits. In short all this adds up to a robust economy, oh yeah the Government also raised GDP estimates.

We feel that recent stock market weakness is a normal given the sharp rise in stock prices and that the basing pattern forming in the charts of the nasdaq composite and S&P500 is healthy. It is our assertion that improving fundamentals and technical strength make this market more of a buy than a sell. That said, we are aware of the risks and may make moves to limit our exposure to volatility.

BOOM - Dynamic Materials is a new addition to our fund. The stock ranks second highest, just below Apple, in technical and fundamental strength. Recently, the stock while basing in the $24/share range experienced a break out to $30/share. We feel that BOOM has more upside. We like the growing niche that is the company's core business (cladding) and the potential that exists for the company to be acquired. We calculate IV to be $52/share.

Key Market Factors Revisited

2005-12-04T20:46:00.000-08:00

If you follow this blog on a regular basis you may have noticed the down time to our site. Although technology propels much of our lives, sometimes it forces us to take a step backward. We experienced some technical challenges last week that we were unable to surmount, for that we apologize.

Technical (market)

The market continued to move higher last week adding to its string of advances. Although all most the major indices were positive on the week it appears that the S&P500 started a basing pattern. Short term technical indicators signal the beginning of an over bought market and may foretell of a small correction. However, the fact that the nasdaq, often a leading indicator, started to break out last week may signal that stocks have more room to run. Multiples are such that this market can move much higher. The question right now is will it happen all at once or after some profit taking? We continue to add to some of our positions on the dips. We expect volatility to pick up starting around Thursday as investors trade through the FOMC meeting next Tuesday and options expiration on the 16th.

Key Market Factors

I have not addressed the Key Market Factors for a few weeks, so I will do it today. Our Key Market Factors rating remains at Neutral. I know the market is moving higher and the Key Market Factors have remained the same, however, markets move first on speculation of change and not when the change is obvious. Our Key Market Indicators is an objective rating and we too speculate as to its ultimate out come.

Oil NYMEX - $58.10 - (negative +)[score -1] - After several weeks to the downside crude oil moved higher last week on speculation that colder weather in the east will increase demand and the fear that OPEC may cut production. Most crude oil traders seem to think that oil is going lower, in fact Boone Pickens projected $50/barrel oil in the short term. All the negative sediment is likely to drive oil higher. I would expect rising oil prices in the short term.

10 year Treasury - 4.54% - (negative +)[score -1] - Treasury yields on the 10 year were down two weeks ago but have risen on speculation that the Fed will raise rates next Tuesday. It appears that the Fed has pricked inflating housing prices and at the moment price stability is intact as core inflation remains low. We believe that rate hikes are coming to an end, in fact we feel that rates may already be too high. That said, it looks like two more rate hikes are in the cards according to the futures market.

4th Quarter Earnings -14% - (positive)[score +2] - Smart money types continue to speculate that double digit earnings are going to be a reality in the fourth quarter. The economy remains robust as the Government recently revised GDP estimates higher and, as mentioned above, core inflation remains low. Further, many companies have stock buy back programs in progress, which tend to pump up eps, as a way of productively using their excess cash.

Opportunities in Transport

2005-11-27T10:20:00.000-08:00

Technical

The S&P500 and nasdaq composite raced above their previous highs to mark a new leg in this bull market. The S&P500 closed the week at 1268, above its trend channel high of 1260. If the index can hold its ground this market has a real chance of moving much higher. In similar fashion the nasdaq composite broke it trend channel high of 2230, again signaling a catch up to higher multiples is underway. Support now exists at those previous channel highs limiting the risk for new buys.

Opportunities in Transport

Since October air transport stocks have moved higher, in part due to the fall in oil prices, but also for more fundamental reasons. After years of reforms and business reengineering the slow drip of financial death still lingers for the major airlines. Former leaders like United, Northwest and Delta are now in bankruptcy forced there by old labor unions and capable competition. Many analysts call this sector dead and only bottom fishers participate. However, we see it differently.

Advances in avionics have enabled new opportunities for regional airlines. Smaller lower cost jets are filling seats where larger planes are only partly so. Regional airlines with 60-100 seat planes that fly farther on less fuel now give companies like Southwest and Jet Blue, with their larger planes, a run for their money. Gary Kelly, Southwest Airlines CEO is quoted as saying, "There's an old saying around here that you never go bankrupt with too few seats or too few airplanes,", and fewer seats and fewer planes are one way that the regionals are gaining market share. Companies like Mesa Air Group, Republic Airways and Sky West are experiencing solid growth. These small yet growing carriers are taking their faster, cheaper, better business models to market and partnering with the majors, helping to level the playing field for the big boys. As a way to save their businesses the Majors have begun outsourcing to the more efficient smaller airlines, side stepping unions and other cost centers. We are coming into the age of the regional, whose business model offers a growing competitive advantage, giving the smart money an opportunity to get in on the ground floor.

Our fund recently added Mesa Air Group (MESA). Mesa was rated the number one regional Airline in 2005 by Air Transport World Magazine. From a fundamental stand point Mesa has shown steady growth throughout the year meeting or exceeding earnings estimates and increasing average seat miles by over 11% per quarter. Further the company recently initiated a 10 million share buy-back program. Below is a table comparing various airline stocks. It is our belief that MESA is undervalued in relation to its peers.

SCROLL DOWN TO VIEW TABLE

Ticker	Price/sales	Price/book	P/E	ROE	Debt/E	IV/shr
MESA	0.27	2.40	8.0	33%	427%	$23
RJET	0.72	3.48	8.3	32%	460%	$11.67
SKYW	1.11	2.21	18	11%	59%	$81.47
AMR	0.14	4.79	N/A	N/A	N/A	N/A
RYAAY	N/A	4.38	21	17%	60%	$49.9
AAI	1.03	4.09	387	4%	85%	$17.82

Ladies and Gentlemen Start Your Engines

2005-11-20T10:25:00.000-08:00

Ladies and Gentlemen Start Your Engines

Close your eyes and take a deep breath. Visualize this, two years of a range bound market with little to no volatility and meager profits for most. Okay, now open your eyes: Asian, South American and European indices all rose this year, some in excess of 25%. Global growth is not just good, its great, the best its ever been; and its getting better.

The nasdaq and S&P, representations of American ingenuity and financial strength, led stock markets out of the internet bust in 2003 and 2004. This year foreign markets performed well as US markets continued, in a technical sense, to wait for them to catch up. Countries like Japan, whose growth decelerated for 10 years or more now show real promise of reflating as "rock n roll" Koizumi leads reforms. Middle Eastern Countries, flush with billions in oil profits need planes, trains and automobiles. South Americans, whose mineral rich nations have supplied the building blocks of the world, need capital equipment, media and modernization. And America, with the most imaginative and least restrictive entrepreneurial society in the world continues to lead all markets in the scope of its growth and its ability to service these growing markets.

On Friday the S&P500 closed at a multi-year high, breaking through the resistance of its two year narrow range. What is interesting is that the index broke a short chain of lower highs setting up the next stage for the stock market. Sure, the smart money could go cold here, but we believe that fundamental and technical indicators signal longer term growth. It will not likely be a move that raises all ships though, as old leaders fall and new ones will rise, and believers compete with non-believers. It will be important to be in the right stocks at the right time as we expect the market to get more volatile going forward and new asset classes take control. The consensus calls for the S&P500 to be between 1250 and 1300 by year end; for sure others expect a flat to lower market. Perhaps the contrarian view should not be slightly lower, but much higher, like 1350-1400. Only time will tell but a rise of that magnitude is not out of the question as other economies compete for leadership and their share of the prize money.

Channel Traders Fight for Control: Will They Win Again?

2005-11-16T07:38:00.000-08:00

Technical

The current rally comes under pressure. As expected the S&P500 and nasdaq composite have met with technical resistance in the 1240 and 2200 area respectfully, as channel traders sell. Adding additional pressure is the fact that it is options expiration week. Volatility generally increases at this time as large traders rebalance their positions around expirations. However, as selling ensues bidders have come to buy the dips.

Crossroads

The stock market is at a real crossroads. Will channel traders win out again, or has their low volatility strategy grown old? Will this market break out out its long term trading range or lapse into its standard patterns? These questions are at the precipice of being answered by the market. In fact, the smart money has already begun to answer them. Institutional investors buying on the dips are holding the major indices at current levels. Smart money investors have had reason to buy this week. Inflation has come in lower than expected dropping the 10 year treasury yields below the 4.50% support level. Oil prices remain lower than the summer highs. And in the face of rising 3rd quarter interest rates and oil prices; 4th quarter earnings are expected to grow in double digits.

Our expectation is that stocks will continue under pressure in the short term then make a move higher into the end of the year. This assumes that the 10 year treasury rates stay below 4.65% and oil remains or falls from current levels ($58/barrel). That said, if rates and oil rise above stated levels or an unforeseen disaster takes place the market will likely move lower on the year. We continue with our current strategy of moving into new leaders. See our website at www.thesmartmoneyinvestor.com for details on the positions in our fund.

IAU - We recently added shares to our investment in the gold ETF. We continue to believe that structural changes in the global economy such as currency risk among non-dollar countries is increasing demand for gold. Further, greater demand for gold jewelry in China and India and the increasing difficulty miners are having extracting the metal add to demand. We believe that an investment in IAU is low risk with a potential for high returns.

Double Digit Earnings Growth Expected for the Fourth Quarter

2005-11-13T20:17:00.000-08:00

Technical

The rally continues for stocks after last week's break out from a seven day basing period. Break outs from similar patterns have shown a tendency to move higher. In addition, S&P500 short term moving averages crossed above the index's 200 day moving average, a sign that the smart money continues to buy. That said, this rally is not without its technical challenges. The indices are nearly at the top end of their long term trend channels, a point where channel traders have taken profits in the past. Will it happen again? Some selling is likely in the 1240 range, but ultimately it will be speculation based on fundamentals that will determine the fate of this rally.

Key Market Factors

Our Key Market Factors are parameters we identified as mattering most to market participants. The smart money monitors these factors closely speculating on potential moves that will drive stocks up or down.

Oil NYMEX - $57.83 - (negative +)[score -1] - Crude oil futures moved much lower last week falling below the $60/barrel level and holding there on a weekly basis, the first time in many months. The recent rally in stocks has been stimulated by the fall in oil prices, a situation that can continue. Further, negative technical characteristics in the chart of the OSX may signal more declines. We do not expect a sharp fall in prices, however, short term volatility is expected. For now we have rated the price of energy as negative plus. We would become more positive with a close in oil below $55/barrel, more negative if oil rises above $60.

10 year Treasury - 4.57% - (negative +)[score -1] - Rates on the 10 year note maintain their position above 4.50%, a less bullish sign. Fed fund rates are expect to rise 50 basis points in the next few months, a level we feel is priced into the market. If commodity prices (as well as salaries) flatten or fall off we believe the Fed will pause in raising rates. Speculation about the future direction of interest rates is likely to move markets. Inflation numbers due out this week will be a major focus of the smart money. Higher inflation increases the chance rate hikes will continue beyond expectations. If the CPI, PPI come in high we expect a short term move lower for stocks; the opposite is true if inflation comes in low.

4th Quarter Earnings - 14.5% - (positive)[score 2] - Analysts expect earnings to remain strong for the fourth quarter, growing at a double digit pace. The fourth quarter tends to be stronger than the third especially for tech, a scenario that will likely facilitate buying in the nasdaq. We remain positive on earnings and continue to buy issues with accelerating earnings growth rates.

MESA - Mesa Air Group will report earnings this Thursday. Although we do not expect any surprises we do expect stock price volatility. Travel remains strong and lower fuel prices are padding profits. Mesa's stock price lags that of its peers. Its current P/E ratio is around 8 verses the P/E of 20+ for similar companies. In our view the reason for the P/E short fall is Mesa's level of investment. Currently the company is expanding, spending money on opening new routes (e.g. Hawaii) and expanding its operations, which is slowing earnings growth. Once the investment cycle is near completion we feel the company's stock price will normalize and industry permitting, demand a premium. Given this scenario we have a target price of $32 per share.
ZHNE - Interesting formations in Zhone's stock price chart are underway in the very short term. Near term moving averages have begun to trend higher, pointing toward the 200 day moving average. Further, the stock has begun a basing period in line with the rest of the market, which could be bullish near term. A break out to the $2.60 level would not surprise us at all.

New Leaders and Old

2005-11-09T10:10:00.000-08:00

Technical

The stock market is acting as expected. An after rally profit taking session has been in progress keeping the market from moving higher. Market action for the S&P500 for the last few days shows a break through tough resistance at 1215 and a settling in at its current level of 1222. The fact that the index stays above the 1215 level bodes well for a move higher. Further, a falling level of volume in the period suggests that profit taking is decelerating. Thus, I would expect the market to base here then breakout higher on a short term basis. Essentially the same scenario is happening for the nasdaq composite, therefore I would expect similar action for that index as well. That said (there is always a "that said"), the consensus expects a year end rally, which could throw dirt on any rally chance. In order to beat the consensus the smart money will be looking in arcane places for the new leaders as any new rally is likely to have some new faces.

New Leaders and Old

The latest rally lifted all stocks including previous leaders that fell hard in October. As the latest round of profit taking plays itself out I expect there to be a change of leadership as old leaders stagnate and new leaders rise. Energy stocks, the hands down leader of the last business cycle, have been a mixed bag of late. Most energy stocks have come off their peaks and have started to tail off during the current round of profit taking, failing to make new highs and putting technical stress on the group. Homebuilders sing a similar song as low interest rates, unprecedented demographics, undervalued real estate and monumental consolidation drove their stocks to all time highs. Now similar structural forces that affected energy stocks are weighing on housing stocks. Rising interest rates and rising housing prices that out pace incomes (as well as high energy costs) are slowing sales and driving housing stock prices lower. If there is a market move higher I do not expect these former leaders to out pace the new ones.

The smart money knows that future market leaders are likely to be stocks that have accelerating earnings in a changed environment. What will the changes be? That is open to speculation. Left to the consensus it will be stocks that do well with lower energy prices, higher interest rates and potentially higher taxes. Only time will tell but I think the market is signaling something different. Financial, semiconductor and transportation stocks have led the recent rally and, unlike the past leaders, have held their gains thus far. What is odd is that these groups tend to be the ones that lead during a new bull market. Perhaps their move is a foreshadowing that interest rates are about to top out, the economy will have a soft landing before it returns to higher growth fueled by globalization, a scenario that is not out of the question and one we lean toward. We are not saying their will be a clean move higher at all; in fact we predict rollercoaster like volatility with peaks and troughs that test investor mettle. Carefully building positions with solid fundamentals and technically timed entry points will help to provide profits levels we are use to. In other words, educated speculation by forward seeing managers is required. We already started to invest in future leaders. See our website at www.thesmartmoneyinvestor.com to view our positions.

IAU - IAU is an exchange traded fund that reflects the day to day movement of gold bullion. There are many reasons to own gold at this time. Increased currency volatility, banking system surprises, stagflation/inflation, global unrest or the fact that gold has begun to break out of a long term base. We are adding IAU to our portfolio as we believe that potential structural changes favoring the metal are growing and technical characteristics exist to support an investment at this time. Further, given the long base that gold has been in we currently believe that downside risk is limited.

Quick Thoughts

2005-11-06T21:12:00.000-08:00

Technical

The S&P500 broke through staunch resistance last week when it surpassed the 1215 level on higher weekly volume. The nasdaq composite followed suit gaping higher through trend channel resistance. From a technical perspective this market wants to move higher.

As I wrote in a previous post I expect there to be an elevated degree of market volatility as the smart money rotates out of their bond positions and into other asset classes. The change will unlikely occur suddenly, however, "market mood swings" are likely in the short term.

Quick Thoughts

We continue to carefully shift into new positions as the earnings outlook for 2006 shifts. We remain neutral on the general market at this time due to the changing nature of our Key Market Factors. That said, a move to lower oil prices and flattening rates could signal excesses in the economy have been lapped up giving the smart money the ammunition it needs to buy more stocks. If the latter case comes to fruition we would expect the S&P500 to rise 5-10% as it catches up with the rest of the world; and the nasdaq composite to do better. Anticipation of lower energy costs and flattening rates would signal to us a buying opportunity is at hand, thus causing us to accelerate or our purchases.

Bond Market Turmoil Equals Opportunity

2005-11-02T23:10:00.000-08:00

Technical

Seasonal buying is in full swing this week as the, "glass half full" scenario plays out. Large investors put their money to work in the stock market driving the S&P500 above its 50 day moving average for the first time in a month. The S&P500 closed at 1214.78 on Tuesday, right against heavy resistance as if to challenge investors. A meaningful move through 1215 on higher volume is necessary if this market is to move higher and stay there.

The nasdaq composite appears to be in better shape as it already broke through its road block when it crossed 2100. Another encouraging sign is that the index closed above its recent trend channel on Tuesday, albeit just, but paving the way for a move higher. The smart money has been buying small caps and tech in selected areas. One would be wise to tread carefully as this market is likely to be vulnerable to bouts of profit taking.

The recent gains have been steep and both the S&P500 and nasdaq composite sit up against some level of resistance, increasing the chance of a short term correction. We have acted with the rest of the smart money buying out of favor small caps and will continue to buy selectively on dips. Check out our website at www.thesmartmoneyinvestor.com to see what we are buying and selling during this run in the market.

A Bond Market in Turmoil Spells OPPORTUNITY

Bonds have sold off recently driving the yield on the 10 year Treasury above 4.60%, its highest level in over a year. Cash coming out of bonds will look to flow to the path of least resistance. Can stocks be the conduit? Cash returns are safe and so far this year have beat the S&P, but 3% is not very attractive given the potential of other assets.

A rising dollar in the face of rising foreign stock markets (the NIKKEI has risen over 20% this year for instance) make US stocks look under valued. I believe that US stocks are poised to catch up with those of Europe and Japan. These markets have risen throughout the year and may be expensive given the fact that both regions are expected to slow next year. Further, as interest rates in the United States rise foreign investors will look to diversify away from the shrinking values of other currencies. That likely means US assets, and at least in the short run US stocks.

Cash exiting bonds and foreign smart money investors looking to diversify away from fully valued markets will likely help to pump up US stocks in the short run. We continue to carefully add to fresh positions and look for new ones. The Focus13 fund has been through significant changes during the last month as we prepare for the tectonic changes taking place in global markets. Stay tuned as we find tomorrow's leaders today.

URBN - We initiated an investment in Urban Outfitters as the teen retail continues to grow its business. With only a 140 stores throughout the US, England and Canada URBN has room to grow. URBN continues to gain popularity among teens with timely fashions and fair prices. Although the stock has come a long way we calculate intrinsic value at $56/share. We feel that URBN will benefit from falling oil prices and a solid holiday season.

Seasonal Factors Favor the Bulls

2005-10-30T08:33:00.000-08:00

Technical

A volatile stock market tends toward the upside after several false starts. The jumpy market has managed to end on higher highs and higher lows over the last couple of weeks. The S&P500 closed up 19 to end at 1198 on Friday. The 1.6% rise was welcome, albeit on just above average volume. The nasdaq composite rose 1.2% on a bit better volume. Unlike the S&P500 the nasdaq composite did manage to stay above its 200 day moving average. The market's performance has been hopeful but less than inspiring, lacking volume, leadership and breath.

Seasonal Factors Favor the Bulls

It is no secret that the last quarter of the year tends to be the best one for stocks. On average the market rises about three percent during the period. Will history repeat itself this year? Only time will tell for sure but here is some food for thought.

The current bull market is nearly three years old. From a long term technical perspective signals say this market is about out of steam. To make matters more interesting the market has traded in a narrow range for the last year, often a sign of a break-out in either direction. If this market does break out soon, the down side has to be favored given the length of this bull market and uncertainty about earnings growth. However, if the Fed is done raising rates the market may move higher, provided fiscal policy remains neutral or better. As I mentioned before in a previous post we are protecting our positions with puts in certain cases and are carefully rebalancing our portfolios.

A Word About Our Key Market Factors

Our Key Market Factors are telling us to be neutral on this market. Energy prices remain relatively high with oil above $60/barrel. So long as the price stays stable at these levels we are unlikely to get more negative on energy. We would become more positive however, if oil dropped below $55/barrel and stayed there for a while. Rising interest rates have made us negative on the cost of money. We feel that a 10 year treasury above 4.50% is at or above neutral and likely to stimulate more savings than spending among consumers. Earnings have been good this quarter with 68% of the S&P500 beating estimates while 19% have fallen short. Still fourth quarter previews have been conservative leaving investors uncertain about their future. It will be the speculation on the part of the smart money that determines the direction of stocks into the year end and beyond. New leaders are likely to emerge at some point. Stay tuned as we find these leaders first.

ZHNE - Zhone remains an interesting investment. Earnings came in flat, which was a victory of sorts given the acquisition of Paradyne. The company has increased its cash position in the quarter by about 25% and revenues have more than doubled, yet the stock trades at about 1/2 its book value and more than a 2x discount to its peers. In our opinion the street views Zhone's business as less than sexy. Although wireline telecom is a dying business Zhone brings new broadband and service life to the thin pair. Zhone's products allow service providers to send voice, data and video through existing phone lines giving customers a competitive choice in many international markets. Zhone now has 640 customers, with no customers having more than a ten percent share of revenue. In fact, Zhone's top 5 customers account for only 29% of the business. In this quarter's conference call CEO Mory Ejabat hinted at the possibility of a tier one customer coming onboard in the next few months. Further, rumors have it that there is a management shake up taking place and the making of a revitalized team is underway. We expected stock price volatility through earnings season and got it with a bit more to come when the lock up period ends in a few days. We are adding shares and remaining patient as we believe this out of favor company is in position to profit in the near future.

Is the Market Going to Make a Tectonic Shift?

2005-10-26T18:30:00.000-07:00

Technical

The smart money waits as the stock market attempts to prove it is ready to move higher before it moves lower. Sure there have been upside days on decent volume, yet the S&P500 remains below its 200 day moving average. Inertia becomes greater the longer the index stays below the 200 day line adding to upside resistance and increasing the chance that stocks will move lower in the near term. Today's action did not help as each time the market attempted to move higher it sold off, ending the day down on higher volume and stinking breath.

Over the last couple of weeks we began asking hard questions about this market and the apparent tectonic shift in progress. We believe that in order to be successful in 2006 fund managers will have to correctly postulate their portfolios around a new paradigm; one with higher rates, a new Fed Chief, an uncertain winter and a possible pandemic. Stay tuned to this blog as we identify the new wave of leaders and usher in opportunities not yet found by the mainstream.

Key Market Factors Begin Meaningful Changes

Capital Markets are being tested right now. The 10 year Treasury closed above 4.50% for the first time since late March. Will the yield continue to rise or will it fall like it did in April? Answer that question correctly and you will profit handsomely. Read on as I will give our perspective on interest rates and the market's other key factors.

First, in order to sum up our perspective and enable the reader to, with one glance, see how we view the current market climate we are adding a Key Market Factors Score to the blog. In short we are adding a number grade to each of the Key Market Factors, which when totaled will represent our perspective. For example, if Oil NYMEX is Negative +, we will assign a number of -1. If the 10 year treasury is Positive -, we will assign a score of +1. When totaled (-1 + 1=0) the result would mean we are neutral on the market. Got it, good, if not read on and it will become clear. For the record the scale is as follows positive + = 3, Positive = 2, Positive - = 1, Neutral = 0, Negative + = -1, Negative = -2, Negative - = -3. A total positive score will mean a corresponding positive perspective, likewise a negative score will mean a negative perspective.

Oil NYMEX - $60.80/barrel - (negative )[score = -2] - Oil prices have fallen from the Hurricane Katrina highs of $70/barrel, however, they are still high enough to tax the consumer. Although we like stable energy prices we feel the market would perk-up if the price was under $55/barrel in the short term. Within the last five trading days the price of oil dipped below $60 showing some promise of relief. Further, higher interest rates are likely to bring the price of energy down. That said, the potential exists for prices to stagnate if a cold winter ensues keeping heating oil prices high. For now we feel the market is impacted negatively from the current price of oil.

10yr Treasury - 4.57% - (Neutral) [score=0] - The yield on the 10 year Treasury note broke solid resistance this week when it crossed the 4.50% level and held. The question remains - is this a short term pop or will rates continue to move higher. Greenspan's "conundrum" may finally be solved as long rates look to be rising in concert with short term rates. On the positive side the yield curve is steepening signaling the economy is expected to grow. The other side of the coin says inflation is rising and growth must be slowed. Only time will tell the future of rates but for now the market is discounting a Bernanke Fed will raise rates and expand the economy.

3rd Quarter Earnings - 17% - (positive)[score=2] - 3rd Quarter earnings are turning out to be positive. In the S&P500 70% of companies reporting thus far have beat expectations with only 14% falling short. Prognosis for the 4th quarter is conservatively positive for the most part with many companies keeping estimates in line with previous guidance. Our surveys report that the economy is growing and companies remain strong with some even having difficulty finding enough qualified employees. Asia is growing ahead of forecast and Europe looks a little brighter than before. 4th quarter earnings show promise, however, other factors of the economy may hamper growth. For now we are positive on 4th quarter earnings.

The KEY MARKET FACTORS SCORE = ZERO, making us neutral on the market. We continue to be busy rebalancing our portfolios. We have started to shift out of interest rate sensitive issues and are looking for companies that will benefit from the changing environment. Airlines and some tech companies have caught our eye and more are in sight. Check our website at www.thesmartmoneyinvestor.com to see what we have added and what we have let go.

BIDU - Baidu.com reported earnings that crushed their previous year's results. The only problem is that they fell way short of what a "Chinese Google" should be. BIDU lifted 4th quarter guidance by about 30%; which normally would be good. However, the increase amounts to only a few million dollars and is chump change when compared to $100 million type increases more worthy companies produce. I would have been excited by a 200%+ increase in earnings, so the 30% was, well disappointing. Baidu.com is apparently China's number one search engine and most visited website. As far as I can tell from the numbers they are mere mortals with a me too product and adding an old school name to their board only makes matters worse. I will have to see more than so, so before I will be willing to pay the premium put on the stock at the moment. At this point $27/share looks like a fair buy point.
MESA - Mesa Air continues to look good even in the face of a negative market. MESA is set to report earnings next week tipping its hand about its latest investments and growing ASM (average seat mile) numbers. Its competitor RJET reported strong earnings today 63% ahead of last year. RJET stock rose 0.06% on solid volume. For comparison RJET has a PE of 9 while MESA's PE is only 7. We see promise for both of these small caps especially MESA and can see $14 a share in the short term based on peer multiples.

Technical Challenges

2005-10-23T22:27:00.000-07:00

Technical

On Friday the VIX (the S&P volatility index) closed above 16 for the week, one of only three times this year. Interestingly, each time the VIX has been above 16 a rally ensued. Finally on Monday the S&P500 climbed above its 200 day moving average after a three week stint that put into question the validity of a nearly three year bull rally. Was a VIX above 16 enough to flush out the hot money and make way for investors? Can this market have yet another year end rally? Is there more to go in this bull market? Based on the technical data we use it is hard to say, but if the stock market can move up from here on higher volume probability favors the bulls.

Short term technical signals for both the S&P500 and nasdaq composite point to an oversold market and are at levels where buyers are likely to reign supreme. The question remains: is there enough buying interest this time to drive through staunch over head resistance? Time will tell, but if fundamental data comes in strong backing up the bulls there is probably enough of a technical void caused by three weeks of selling to rocket stocks.

Monday's rally was a significant follow through as many indices gained over 1.6%, albeit on so so volume. If the rally is to continue the first test will come for the nasdaq as it must climb above 2125 in the short run on higher volume to break through some tough resistance. The same is true for the S&P500 at the 1215 level, which has been a real sticky point.

On a longer term basis this market is more over bought than over sold. From a technical perspective I would not be surprised to see a repeat of last year, where a year end rally yields to strong selling at the beginning of 2006. I believe globalization will fuel long term growth, however, the phenomenal growth in Asia and South America is likely to slow as widening imbalances tend to equilibrium. Hopefully, if and when there is a global slow down it comes with a soft landing, but, a market lacking volatility like this one increases the chance of a harder fall. Look for increases in VIX fluctuations as time passes. It would be better to have greater volatility now then to get it all at once. The fund is likely to purchase more protective puts than what we have over the past two years in order to protect profits in a volatile market.

We are in the process of rebalancing the fund. We have been very busy lately as we remove old leaders and shift into future ones. We continue to stay with our strategy/philosophy (visit our website at www.thesmartmoneyinvestor.com to learn more). Stay tuned as we make changes to maintain the fund's yields above 50% for the year. You can see what we are doing by visiting our website.

BIDU - Baidu.com is set to report earnings on Wednesday and investors are buying now in hopes that the stock will mirror the performance of Google. Shares rose above their 50 day moving average on Monday, a positive sign as the stock has fallen about 50% from its 52 week high. Some analysts call for a $45/share valuation based on earnings growth and market multiples. However, investors see a future significantly above that of market analysts, buying into a faster than estimated 100% 2006 earnings growth. In addition, investors have a buy-out premium on the stock, believing the company could fetch north of $4 billion in an acquisition. At $80/share we believe the stock is fairly valued when compared to its peers; that takes into account accelerated eps growth, market conditions and a buy-out premium. By now Baidu.com should have about 1,000 employees, a ten fold increase over last year. We will be looking for how well Baidu.com management has employed these assets. Further, we are interested to see the progression of search advertising on the site. For now we feel that BIDU promises more short term trading profits than investment opportunities. That can change however, if Baidu.com management can prove it is capable of growing earnings way above consensus estimates.

GUTS

2005-10-19T18:43:00.000-07:00

Technical

Investors woke up yesterday as an oversold market collided with positive earnings and beige book news. Shorts were squeezed and the longs were paid. The S&P500 closed at 1195 up over 17 points, but still below its 200 day moving average. The nasdaq composite did even better closing at 2091 up over 35 points and closing above its 200 day line.

It is apparent that investors began to speculate earnings were going to be good and inflation would be in check. The smart money dipped its toes into the market starting last Thursday and continued to buy. The market is not out of the woods yet, however, it took a step in the right direction.

We continue to remain cautious although we began to add new positions. This is a tough market as many changes are underway. It will take guts to make some of the hard decisions necessary in order to profit from the future. Check our website at www.thesmartmoneyinvestor.com for the details.

Key Market Factors

As expected our Key Market Factors, being in flux, have driven the market. Part of the reason for the recent reversal is the more positive nature of our indicators. Oil has fallen in price. Interest rates, although providing a wall of worry, remain below 4.5% on the 10yr. And earnings are not looking so bad. Below is an evaluation of the status of the factors.

Oil NYMEX (positive -) - $59.55 - Recent hurricane activity in the Gulf drove up prices last week. Obviously, the hot money was quick in and quick out as the storm moves away from oil rigs and prices fell. Further, oil consumption was weaker than expected as inventories grew for the week and gasoline prices fell 6%+ the last few days. Falling demand and growing supplies are firming up the picture for the market as energy costs fall.

10 yr Treasury (positive) - 4.48% - Inflation was on the top of investors minds last week as CPI and PPI came in higher due to the recent hurricanes. However, underlying core inflation seems to be in check and the economy looks to be cooling. Our surveys confirm this reasoning. Resistance at 4.50% continues to stand up and consensus is growing that the Fed can continue to move rates higher at a measured pace without hurting the market.

3rd Quarter Earnings (positive) - 17% - positive earnings continue to come in without surprise. More importantly, 4th quarter projections remain in line for the most part. There are still a fair amount of reports left but as of today earnings are on the rise.

There are many opportunities for the smart money to participate. That said, there is a lot of dog doo out there, so watch your step. We continue to adjust and remain positive on the overall market.

MESA - We have begun to add Mesa Air to our fund as the environment for airlines looks better. Falling fuel prices are also having a positive effect on the group. MESA operates flights for United Express, America West Express and Delta Connection. Rising prices and falling costs are a positive for the company in our estimation. Check the website for targets.
ZHNE - Zhone will report earnings next week. We feel that costs related to its recent acquisition and reorganization are already built into shares. However, we do expect price volatility around the earnings report, which is typical for the company. ZHNE continues to lag its peers and can catch up as it goes into the better 4th and 1st quarters. The sale of its legacy systems may add a one time pop to earnings. The current stock price is at a level where insiders previously bought millions of shares.

Core Concerns - Interest Rates and Earnings

2005-10-15T17:38:00.000-07:00

Technical

Both the S&P500 and nasdaq composite ended the week below their 200 day moving averages, although both indices finished on the way up. Many investors feel with the declines of the last few weeks the market is due for a bounce as stocks became "oversold". However, on a weekly basis the market may not be as "oversold" as it appears. Indicators are at levels not normally associated with a meaningful correction. Only time will tell but I will need to see a bit more technical support before I believe the tape says its okay to buy away.

Core Concerns

Today investors' core concerns revolve around interest rates. The 10yr Treasury has hovered around 4.48% all week, a tick or two below the heavy resistance levied at 4.50%. The fear is if the 10yr yield breaks above 4.50% it will not move lower for some time. Although, inflation fears were quelled somewhat when core CPI was reported last week, all indications are the Fed is determined to deflate asset bubbles floating around the economy and will continue to raise rates. With the inertia of higher rates pulling down growth 4th quarter earnings will be in danger of falling short of analysts estimates. Our studies show that the economy has begun to slow and the smart money has already begun their asset rotations. In the coming weeks we will be keeping an eye on the 10yr as its yield is on a precipice from which a change in trend can occur. If the yield moves above 4.50% for any length of time we are likely to change our investment strategy.

As if changes in interest rates were not enough investors will be fed the main course of 3rd quarter earnings this week as the core of the S&P500 serves up their numbers. As I mentioned in a prior post investors will be less concerned with the actual numbers than with what is said about the future of earnings. Expect future projections contained in the reports to drive the market. Thus far the earnings that have been reported have been pretty good. Again, the question will be can companies keep them growing profits above trend.

In summary we are taking a wait and see approach before leaning into this market. We are waiting for what is said between the lines of 3rd quarter earnings reports and what the tape does before we act. That said, rising interest rates and stubbornly higher energy costs will force us to speculate on the short side if either spikes higher in the short term. Stay tuned during the week to see what we do. You can see our changes by visiting our website at www.thesmartmoneyinvestor.com.

Good News: This Market Looks Pretty Bad

2005-10-12T15:03:00.000-07:00

Technical

This market looks pretty bad hopefully that is good news. Volatility as measured by the VIX closed at 16.22 Wednesday, which is a five month high. Around this level I would expect a bounce, however, the stock market's breath stinks and selling has been notably fierce. I am not going to rule out a turn around from here but stocks are more likely to see a dead cat bounce if the buyers come back too soon. For all the reasons I wrote about in my last post the projected fundamentals and ensuing technical characteristics of this market seem to be in sync. It is likely the stock market has more down side to go.

The S&P500 closed at 1178, the sixth day below its 200 day moving average. The longer the index stays below the long term trendline the greater the inertia to get above it again. As bad as the S&P500 has been it is not the real story. Small caps and nasdaq stocks have been hit harder. The nasdaq composite is down 9% from its August high with many high beta stocks dropping 15% or more. Former leaders from tech, energy and the homebuilding sectors have been hit the hardest, signaling a change is leadership is coming.

We continue to reduce positions and look for new opportunities. I am reluctant to short until it becomes technically feasible. By that I mean I want to see a bounce and evaluate the situation before we make the investment. The market is in the middle of correcting as the smart money positions itself for the new market realities ahead of it. All our Key Market Factors are in flux and with the addition of some new worries this market is likely to be volatile for a while.

Fed Funds Rate Above 4%

Earlier this year I wrote that if the Fed Funds Rate went above 4% we would likely reduce our stock investments. We still feel that neutral is about 4% and rates above that level will likely slow the economy more. From all indications at this time it looks like we were right. Investors believe that 3rd quarter earnings are going to be fine, its beyond that worries them. Ex-energy the S&P500 is expected to grow earnings about 12% this quarter. At this time analysts are only projecting 10% growth for the same group into next year. High energy costs and the perception of rising inflation are backing them up. Our studies show a notable slow down in the economy. This slow down is likely to continue until rates start to fall. Stay tuned as we navigate through this portion of the business cycle and come up with profitable positions. You can see what we are doing by visiting our website at www.thesmartmoneyinvestor.com.

MESA - The airline group has been beaten pretty badly over the last several years. Most of the majors are in re-organization; now opportunities exist for savvy competitors. MESA is one that looks to be one taking advantage of the situation. We are looking at MESA and calculate its intrinsic value at $19/share (currently it is trading at $9.5/share). If higher rates bring down fuel costs airlines are positioned to profit as consumers have become acclimated to higher prices. We are likely to add a position on a pull back.

Is it Time for Bold Moves?

2005-10-09T21:06:00.000-07:00

Technical Perspective

If you follow this blog you know that the stock market's slide was pretty well telegraphed. Two days of back to back heavy selling in late September set up a consolidation period (probably end of quarter window dressing), a failed rally attempt and more declines last week. Now the S&P500 sits below its 200 day moving average with the nasdaq composite closing in on the long term trend line. Some of the hardest selling in recent memory was executed last week, a sign that market forces are changing and more weakness could follow. Some indicators say that the market is oversold, while others show there are more declines to come. We remain cautious and have reduced many position. Further, we have our eyes on new opportunities both long and short.

Is it Time for Bold Moves?

The smart money is in speculation mode. They will ask themselves the tough questions and are likely to take bold moves in order to be positioned properly. Economic cross currents will collide in the coming weeks as earnings, inflation and energy costs mix to color the future picture for stocks. In addition, other forces are stirring in the back of the mind's of investors: bird flu, terrorism and natural disasters act to change the hue of the stock market.

First, lets consider the latter group. Bird flu is gaining attention as a potential pandemic. Government estimates of up to 1.9 million deaths could result from a US outbreak of the foul threat. SARS quickly clamped down China's economy taking stocks with it. It is feared that a similar outcome could result from a break out of bird flu in any major global economy. Look for the market to be initially shocked if one case is reported in the US, especially given rise of political and media attention. A like response would also occur if cases were reported in any major global economy. I believe the market is yet to discount a bird flu threat, thus look for down side pressure from the disease.

Terrorism is now a market reality and to a certain extent US citizens have become numb to the fact. Depending on the magnitude and logistics of a future terror strike the market is going to act accordingly. I think that some of the market's decline of last week was at least partially attributed to the terror threats in New York and the market will continue to discount an attack more or less depending on the media and the threat.

From a market perspective natural disasters strike hard up front and tend to recover and give back during the rebuilding effort. Hurricane season is nearly over and a major hurricane in the Southeast is unlikely until next year. Barring an earthquake, tornado or other disaster the effects of Katrina and Rita have likely been discounted and perhaps over reacted to by the market. I think the drop in the price of oil and gasoline, in part, is due to a hurricane induced price overshoot.

Far and Away it is the Details in Our Key Market Factors That Will Drive Markets

Without a doubt uncertainty about earnings is what recently drove the stock market lower. Not so much about actual 3rd quarter earnings, rather what might be said (or not) about the future. In my Key Market Factors commentary I address some of the details to be considered for the future of earnings.

Oil NYMEX (negative +) - $61.80 - Higher interest rates and the perception that energy conservation efforts will begin in earnest helped to reduce the price of oil and gasoline last week. Japanese and Korean automakers are stepping up production of hybrid and fuel efficient cars. Only time will tell whether the commodity will drop further, but many energy companies led to the downside last week. If earnings worries were not front and center the recent fall in energy prices would have likely pushed the stock market higher, but that was not the case. Either the market believes that oil prices are going to rise again, which is unlikely given the sell-off in the sector, or stocks are going to be affected by other inflation drivers, which have not risen like energy has. This discontinuity may be due to an asset rotation taking place on the part of large investors. Certainly it means that opportunity exists.

10yr Treasury (positive) - 4.37%- Long term interest rates have risen recently as the Fed appears more hawkish. I thought it was interesting that all Fed Governors came out talking tough on inflation. To me it seemed orchestrated and certainly it affected capital markets. Greenspan seems to be getting what he wants. The talk was enough to squeeze much of the speculative money out of the energy and housing sectors. Although the results are negative for the market in the short term falling energy prices and inflation will strengthen stock prices in the future.

3rd Quarter Earnings (positive -) - 17% - Investors are worried that 3rd quarter earnings are going to fall short of estimates as natural disasters, rising interest rates and a slowing economy have taken their toll. What makes matters worse is the speculation on what might be said about the 4th quarter and beyond; a major reason for the fall in stock prices last week. This week is likely to give a glimpse into what lies ahead for earnings. News from earnings reports are going to drive the market for the foreseeable future. A careful watch of what is happening will give hints about the next business cycle. Stay tuned as we sort through the minutia and make investment decisions for our fund. Visit our website at www.thesmartmoneyinvestor.com to see what we are doing.

RIO - We are watching Comp Vale Do Rio as the recent decline may be a buying opportunity. If speculators drove up the price of oil beyond its natural value mining stocks stand to benefit. Energy is a major cost for metal producers and profits may accelerate if crude falls further. We sold some shares on technical weakness, however, the stock's technical characteristics look to be strengthening. Visit our website to see what we do.
ZHNE - 2.5 million shares of Zhone were quietly traded on Friday, 300% above average daily volume. It appears that the smart money was buying shares on sale. The sector has under performed for a long time, however, it looks to be poised to improve. Jabil Circuits, a large contract manufacturer that specializes in building equipment for the telecom industry, reported solid sales and earnings on September 26. Looking ahead, Jabil said that it was on track to meet analysts estimates. Such activity bodes well for Zhone and others in the sector. We are adding to our position in Zhone.

The Smart Money Repositions for 2006

2005-10-04T19:59:00.000-07:00

Technical

The S&P500 fell hard late yesterday as all of the gains from the last few sessions pulled back to the 1214 support level. A close below this level in the next few days would likely mean further declines. In that case, I would expect a change in leadership and a high level of volatility as large investors build their 2006 positions. The nasdaq composite is in better shape, although it too has fallen below its 50 day moving average. A real challenge for the tech heavy index exists if it fell below 2120.

Based on the magnitude of the sell-off I would say the smart money has begun to reposition their portfolios. The media called it "a sell off on inflation fears", I say it was 3rd quarter earnings jitters and profit taking ahead of a changing business cycle. We are cautiously optimistic however, we have started to make some changes after 10%+ gains to our Focus13 fund in September. Visit our website at www.thesmartmoneyinvestor.com to see our current positions.

Below I have listed the top and bottom five performing sectors the last two days. It looks like investors started to move to more defensive sectors as Retail, Metal and Real Estate Operations took it on the chin. Interesting enough Medical Software, Rail and Semiconductor Equipment showed good gains as well as the five below.

Top Five Performing Sectors

1. Diversified Drugs
2. Generic Drugs
3. Building Maintenance
4. Airline
5. Telecom-Fiber Optics

Bottom Five Performers

1. Computer Peripheral Equipment
2. US Oil & Gas Explorers and Production
3. Integrated Oil
4. Commercial Builders
5. Oil and Gas Drillers

NTES - Chinese internet stocks have caught the eye of investors. Even though the nasdaq fell sharply yesterday NTES was able to hold on to 2% gains. Recently the Chinese Government announced plans to combat online gaming addition. As a result companies such as NTES have levied, what amounts to penalty points to over active gamers (gamers who play more than 3 hours at a time). By reducing the amount of "experience" points a player could earn after three hours of play Game Providers feel they will reduce over play by patrons. It has been reported that over 41% of all Chinese gamers play for 4 hours or more. Investors are waking up to the value of these stocks. We have calculated intrinsic value for NTES above $270/share and will likely add shares on a pull back. Further, the company is a component the USX China Index, which is traded on the AMEX.
BIDU - So far investors see more value than the, "at best" $45/share value Goldman Sachs and others have put on the shares. It appears that many investors are looking beyond near term earnings growth and are betting Baidu.com will grow faster than expected. We continue to value BIDU in a line with its peers. BIDU has recently been added to the USX China Index, thus increasing demand for its narrow float.
SNDA - Shanda Interactive Entertainment is the largest Asian Game Provider, yet a diversion between its stock price and its peers' stock price exists. The company appears to be building technical strength as it has based in the $26-$28 range for the last couple of weeks. In addition, the stock has about 3% of its shares sold short. The company continues to add new games and looks to be growing users beyond its peers with 18.5 million paying accounts. We calculate SNDA's intrinsic value at $114/share well above our 2x IV/Mrkt price rule.

Its All About Earnings

2005-10-01T19:03:00.000-07:00

Technical

The S&P500 ended the 3rd quarter above its 50 day moving average (dma) bolting from a sound base of support at the 1215 level on Thursday. Friday's close at a minimum gave confirmation of the move as the index stayed above its intermediate trend line, albeit just. Market internals point to a slightly oversold condition probably a product of end of quarter window dressing by institutions. The nasdaq composite acted similar to the S&P500 although its close was just shy of its 50 dma. Like I mentioned in my previous post, if either index can stretch higher in the near term (close above 1245 on the S&P and 2219 on the nasdaq composite) they would complete a "W" pattern, which is considered very positive by many market technicians. As usual the devil is in the details and only time will tell.

Its All About Earnings

Barring a hurricane or other disaster earnings reports are likely to drive the stock market this month and most of next. Now it is analysts expectations and the footnotes that will test the mettle of investors. Two hurricanes, spiking energy prices and rising interest rates have served to slow consumer confidence and dent the books of many businesses. There will be plenty of blame to go around, however, the smart money will be ever vigilant in sorting the true disaster costs from companies that merely dropped the ball. Executives will have to provide tangible evidence for why their bottom lines were temporally affected. Opportunities will exist for investors who are able to read between the lines. Stay tuned as we sort through the rubble and find profitable gems. Visit our website at www.thesmartmoneyinvestor.com to see our positions and their targets. Bookmark it, or better yet add this blog to your reader to get updated when changes are made.

As is the case every year expect money managers, especially the ones who manage for government employees, to re-balance their portfolios by October 31st. Opportunities will exist as managers shift assets into issues they believe will lead next year. Energy, healthcare and tech are the favorites right now but there are no guarantees. On the surface we are looking at tech and insurance as possible turnarounds with energy and commodities continuing to draw our attention. In coming posts I will identify some of these ideas, in fact I have included one below.

Key Factor Update

3rd Quarter Earnings (positive +) - 17.6% -Thompson Financial recently upped its earnings target for the 3rd Quarter. Until now we have use 16% as our year over year growth target for 3rd Quarter earnings. Growth in the energy sector has bumped up analysts estimates again. However, if we remove the energy sector from the S&P500 analysts predict 12% growth, which is not bad as it remains in the double digit range. The up coming quarter will be challenging for money managers as the economy has been in flux and much has shifted. I expect that there will be a change in leadership as investors move away from slowing businesses and into up and comers.

We continue to be cautiously optimistic into the end of the year. We believe that it remains a stock pickers market with increased risk and volatility expected through earnings season. We are likely to add protective puts when prudent to protect our profits and shift into new positions as opportunities present themselves.

ZHNE - We recently re-entered a position in Zhone Technologies for all the same reasons we bought it before (we were stop out of our previous entry position). From a market technical perspective the company looks to be bottoming out as the stock pushed above its 200 dma on higher volume. However, 3rd Quarter earnings look to be messy due to the acquisition of Paradyne and a re-balancing of its product mix and may spell further downside for the stock. Currently, we feel that the downside is limited. If investors can get beyond the current spat of corporate re-engineering we feel that the stock has a ways to go. First, Mory Ejabat its CEO is a prolific acquirer. His methods are not always pretty, or successful, but he always cuts his targets to the bone and gets a lot for a little. When he is right he is right and some of his previous buys have been monumentally successful. Second, on Friday the company announced the sale of its ARCA-DACS product line to Verilink. What is significant about the transaction is that in the past the line was the company's main source of revenue as newer more market grabbing lines were developed. We view this as a signal that the umbilical has been cut and management has shifted its focus more fully to the next generation and beyond. Third, many of the company's industry peers have had their market caps double or tripled in the last year. Since Zhone took on this relatively large acquisition during that period we feel that investors have taken a wait and see attitude with the stock. Obviously, we are speculating that the company will integrate successfully and skeptical investors will add ZHNE shares to their portfolios. Lastly and perhaps the most compelling reason to own ZHNE is that the market for Zhone's products is growing. In previous posts I discussed the resurgence of broadband; Zhone is smack in the middle of it.

Two Steps Forward and One Step Back

2005-09-27T21:27:00.000-07:00

Technical

What does 1214, 1215, 1215 and 1215 have in common? They were the closing numbers of the S&P50o for the last four days. Tight closes like this usually signal a meaningful change in market direction is coming. The nasdaq looks similar, although its formation is not as tight. A break out to the upside on solid volume, in either index, would complete a very positive technical pattern and could initiate a market move much higher. Unfortunately, a meaningful move lower would probably mean more to the downside.

Key Market Factors

If you are new to this blog our Key Market Factors are market driving parameters we use to help determine the health and direction of the current market. The actual numbers do little to influence the market rather it's the speculation on the future direction of each that does the driving. These factors have been identified as parameters that are top of mind awareness for the smart money. From time to time we update our ratings and give commentary on each...it is time.

Oil NYMEX (negative) - $65/barrel - The US energy situation is in flux thus we have moved our energy factor from negative plus (+) back down to negative. That said, much of the volatility is due to the uncertainty caused by refinery damage from the recent hurricanes. Although the media is echoing refineries will be down for months it turns out that only a few will be down that long with the majority of gasoline production coming on line by the end of next week. I would expect more volatility in heating oil, gasoline and oil until the hurricane damage has been made clear. If energy markets can stabilize, especially at lower levels, look for the head winds caused by the commodity to be lifted and the stock market to act favorably.

10yr Treasury (positive) - 4.30% - Interest rates remain accommodative in our view. That said, Alan Greenspan was talking down markets on Tuesday as he warned of asset bubbles and how euphoric conditions precede a fall in the value of those assets. It is obvious that the fed wants to cool inflationary pressures specifically in housing and energy, therefore, we expect rates to rise further. That said, there is strong resistance at 4.50% and we are likely to remain positive until that level is breached. If the 4.50% level is broken we may not become completely negative on the stock market because we believe money will come out of bonds and go into stocks.

3rd Quarter Earnings (positive) - 16% - We remain positive on 3rd quarter earnings as global growth is strong and the economy continues to grow according to such groups as the IMF. Most world economies are at or near full employment and inflation although rising is contained and signaling healthy growth. Of all the companies in the S&P500 216 have made pre-announcements with 56% of them making negative comments and 28% being positive. In contrast to last quarter where 53% pre-announced negatively and 27% were positive, staying mostly in line with the previous period. That said, costs are rising and will affect certain sectors more than others. We believe the market will continue to reward those that pick the right stocks.

Two out of Three of the Key Market Factors are positive. If we give equal weight to each the market should take two steps forward for every one step back. We are cautiously optimistic about stocks at this time. We continue to believe it is a stock pickers market and strict attention to near term fundamental details coupled with technical awareness will continue to yield good profits.

BIDU - Baidu.com broke down technically falling below its $71 support level. This bodes negatively for the stock. Although we believe that bidu has a valuation near $3b based on its peers values we are apprehensive about making an investment at this moment. First, Baidu.com is an up and comer and earnings, although growing faster than its peers, are not at peer levels. We are not likely to fight the tape at this point since negative opinions from several brokers have been made on bidu. Further, there has been some near term selling in the group. Stay tuned as we continue to monitor the technical situtation and attempt to identify a new entry point for adding the stock to our Focus13 fund.
NTES - In contrast to bidu Netease continues to maintain its technical strength. Fundamentally, ntes has a higher level of earnings than bidu. In addition, we also like the quality of ntes earnings. We calculate intrinsic value for the stock at $270/share based on 2006 numbers. At this moment we are more likely to invest in ntes than in bidu.

The World Continues to Grow

2005-09-24T20:39:00.000-07:00

Technical

On a weekly basis the S&P500 is screaming weakness. Over the last two weeks 173 million shares have been traded on the down side, more than any two week period during the last several years. In my experience events like this tend to precede long hard falls.

The nasdaq composite acted in similar fashion to the S&P500. Although the last two weeks for the nasdaq were down on higher volume, it is not the weakest two weeks of the year. The first two weeks of 2005 served up more intensity to the down side, and incidently preceded a long hard fall.

Amazingly the market has held up well given the today's situations, a signal that investors are sanguine on stocks. Technically speaking both indices did break through support last week only to end the period on a positive note, albeit on lower volume. The S&P500 did manage to climb back above its previous support level. However, the nasdaq remains well below its support level of 2144 causing concern among technicians. The infliction of fear drove the VIX steadily higher most of the week driving it above 14, but by midday Thursday the volatility index turned lower ending Friday at 12.96 as the market found support. Thus far a VIX above 14 has meant support for the stock market.

We are cautious at time. However, so much has been thrown at this market, two major natural disasters, spiking energy prices and rising interest rates, yet the market continues to hold up. The fact that the S&P500 recently rallied to 2143, a level below the year high of 1245 but above the previous high of 1229 tells us that there are signs of technical strength. Only time will tell for sure but a high level of down volume over the last two weeks may be due to uncertainty about the natural disasters rather than pending economic disasters; that said we are not going to fight the tape. Visit our website www.thesmartmoneyinvestor.com to watch what we are investing in and how we navigate these stormy times.

The World Continues to Grow

The IMF projects the world economy to grow 4.3% in both 2005 and 2006. In the same report they project US growth at 3.5% in 2005 and 3.3% in 2006. In addition, the report says China is to grow 9% in 05 and 8.5% in 06 and India is expect to grow above 4% in both years with Europe showing growth above 1% for both periods. The bottom line is the world is doing new business and that means new opportunities. The smart money is banking on this growth and whether or not the stock market pulls back now there are going to be profitable opportunities in the future.

Growing concerns about inflation are perhaps another culprit for downward pressure on the market at this time. It is obvious that the Fed wants to keep prices stable and it has been clear, as clear as Greenspan wants to be, that it is going to curtail inflating asset bubbles. Interest rates continue to rise, even in the face of debilitating natural disasters, because there is global demand. Commodity prices from oil to copper continue to rise as the world builds and the south repairs. Businesses and global economies are being squeezed by higher costs, yet most remain at full employment. What I find most beautiful about this period is how in the face of so much negativity innovative entrepreneurs continue to quickly adapt their businesses and crank out productivity. Further, the rebuilding of the south will help growth next year, a point that the smart money is considering right now.

History Repeats Itself or is It Different Now

It is becoming apparent to me that historic models will become less effective in the future. One Microsoft Executive put it best, " there will be more change in media in the next five years than there was in the previous 50...". I feel that investors must look beyond the history and into the details of their business today to make solid investment decisions that take advantage of change. If they do not they will be left behind. Stay tuned and watch what we do to adapt to this change. Visit our website at www.thesmartmoneyinvestor.com where you can see our fund's investments.

Its Not Nice To Fool Mother Nature

2005-09-22T19:28:00.000-07:00

Technical

The S&P500 wasted no time turning south for September. The index not only broke through its 50 day moving average but also has poked through its recent trend line bottom of 1211, closing at 1210. Making matters worse the whole move down has been on higher volume. The nasdaq composite did even worse with both indices now racing toward their 200 day moving averages.

Unquestionably, the market is sending short to intermediate term sell signals. The recent market action has us taking profits and looking for new opportunities. I have learned that through all this negativity one must stand back and do some situation analysis.

The Good with the Bad

First, consider the VIX, the S&P500 volatility index, it jump 1.15 yesterday to close at 13.79 telling the smart money that the market is scared. Many attribute the rise in the VIX to uncertainty about Hurricane Rita. Usually, the market discounts the worst and then bounces back. That said, things could be worse than expected and the market would fall more as Rita upgrades from a Category 4 to Category 5 storm. I would expect the market to hold up a bit better as the VIX continued to rise, however, if the storm causes more damage than expected all bets are off.

Second, some sectors are doing well. Metal Ores, Energy, Healthcare and some Technology stocks are holding onto gains and in some cases doing better. No doubt costs are rising and affecting the profits of some sectors more than others. By properly positioning the smart money can make profits in a down market.

Retail and Housing stocks were classic shorts and opportunities may still exist, although they are more risky than a few weeks ago. Oil and heating costs look to increasingly bite into consumer spending. For sure gasoline is hurting some, but heating costs will likely hurt more consumers further denting consumer discretionary spending. We are watching for more short sale opportunities and have our eyes on a few. Check the website as we will post our positions there.

Finally, there is significant risk in this market. Global growth has been good thus far and continues to fuel stocks at this time. However, many countries subsidize oil and gas prices creating artificially low prices. Economists know its not nice to fool mother nature and sooner or later higher costs will be past on to foreign consumers denting their profits and growth. To the extent that foreign governments unwind these subsidies we will see a near term change in foreign growth. Longer term these governments will need to allow nature to take its course and let the price of energy float at market values. In the interim many opportunities are going to be created and taken advantage of by the smart money as these inequities tend toward equilibrium. Stay tuned as we take advantage of the situtation.

Our Focus13 Fund has had Good Gains this Month

Out of the ten positions the fund held through the recent rally we have only been stopped out of three, Ebay, Zhone and Abercrombie and Fitch. Many of our positions are doing well, for example; Celgene a stock we bought around $42 went as high as $59; we took some profits above $56. Comp Vale Do Rio, a stock we first bought around $33, hit $42 yesterday. We shorted Beazer homes at $62 and took some profits yesterday at $56. And Google, which we bought at $282 rose to $318 today. My point is that there is value in this market one just needs to find it; of course that is our job. You can track what we are doing by visiting our website at www.thesmartmoneyinvestor.com. There you will find a table listing all the positions in our Focus13 fund and the buy and sell targets we use. Also, we post a link to our monthly performance that gives some detail into how we did during the previous period.

GOOG - Google continues to be a buy for many investors as the stock has risen on increased volume while the rest of the market falls. The company continues to expand beyond its core search business augmenting nicely businesses that are complimentary to its center. Google has become the new age media giant, offering advertisers ways to reach their customers that are more targeted and global than ever before. No other media company match Google's growth and breath numbers. Internet advertising continues to take market share from traditional media sources sucking the life out of newspaper, magazine and television competitors (just look what is happening to the NY Times). This growth is expect to continue as internet advertising is about 1/20th of all media spending and growing. But Google is going way beyond the internet. For instance, look at Google's new WiFi offering. Many see it as just a secure way to get more users in front of Google, however, we see something more exciting. Think about it, what if Google's WiFi network were to expand nationally or even globally and what if Google coupled the WiFi service with Google Talk, the company's new VoIP telephony service. Could this mean that Google would become a large wireless and wireline telecom company? Just food for thought but all the pieces are falling into place. There are many other businesses that Google is positioned to enter, all with the potential to take market share from companies inside and outside of media. As I stated in previous posts media power brokers are finding it necessary to own and control Google if they can. We expect the buying to continue for Google especially since it is likely to be added to the S&P500 in the near term. Index fund managers will have to own the stock and many are likely to anticipate the move, buying ahead of an announcement. See our website at www.thesmartmoneyinvestor.com for more details on Google.

Higher Highs and Higher Lows Until Now?

2005-09-18T08:01:00.000-07:00

Technical

The market has maintained its upward bias since its April '05 low. The S&P500 has maintained a series of higher highs and higher lows since then, until now. Last week the S&P500 topped out at 1243, lower than the previous high for the year, which was at 1245. The failure of the index to break higher last week brings into question whether this market can move further north as overhead resistance builds. That said, in its favor the index bounced off its 50 dma in classic form, although much of the action may be attributed to options expiration and an S&P rebalancing.

The nasdaq composite has not performed well as it remains below its 50 dma, albeit just. Much like the S&P500 the nasdaq composite failed to break through it previous high of 2219. Making matters worse the index did not clear the 2191 level, which was the January 2005 high, adding to the resistance. Much trepidation on the part of investors is due to the traditionally weak 3rd quarter for many industries. The smart money is trimming positions ahead of what is feared to be a tumultuous earnings warning period of the next few weeks and uncertainty about the Fed. If earnings warnings are held to a minimum expect cash to rush back in and the market to rally further, else, a retest of this years low is likely.

I have to admit this recently rally looks to be weakening. If technical characteristics from the nasdaq carry over to the S&P500 it could spell trouble for many issues. The fund has added several new profitable positions in the last few weeks. We have taken profits in some of them and may take more depending on the stock market's technical strength. To see what we are doing visit our website at www.thesmartmoneyinvestor.com.

Key Market Factors

At the beginning of the recent rally we identified certain parameters that the smart money would follow closely and likely dictate the rally's direction. We call these parameters "Key Market Factors" and we comment on them from time to time. The "Key Market Factors" are more in flux now than at any other time during the current rally. Speculating correctly on each of the factors is critical to the success of any investor and is likely to separate the smart money from the weak when it comes to near term profits. Below is our take of the current standing of our Key Market Factors.

Oil NYMEX (negative +) - $63/barrel - The price of Oil has come under pressure lately for a number of reasons, thus we have moved the rating up to negative plus (+). First, the damage to oil platforms from Katrina is proving to be less than expected. Second, consumption is down as users cut back and find ways to save. Higher interest rates have energy speculators concerned that consumption will slow even further. Of course all the aforementioned issues come on the back drop of heating oil, which will likely support prices until something concrete about the winter season is known.

Interest Rates 10yr Treasury (positive) - 4.27% - Although rates have risen from recent lows we still deem them positive because in our estimation rates remain below neutral. Even if the Fed raises a 1/4 point on Tuesday, as they are widely expected to do, we feel rates remain accommodative. That said, a spike in the 10yr above the 4.50% level would likely be negative for certain stocks and depending on how far rates rise negative for the market in general. The uncertainty about rates may force the hand of uncertain investors and bring down the market until the rate picture becomes more clear. Some financial companies have seen a drop in loan originations according to our surveys.

3rd Quarter Earnings (positive) - 16% over 3Q last year - Spikes in energy costs are going to affect the earnings of many sectors especially in retail, transport and materials . Starting this week the smart money expects earnings warnings or adjustments to begin with the selling in certain stocks already well underway. But global growth continues and fresh leadership from the semiconductor group have given long investors inspiration. In addition, a weaker dollar is helping global businesses out. We are sure that earnings will slow for some companies, however, others will thrive. Stay tuned as we work to maintain thriving stocks in our Focus13 fund.

BIDU - It is true that chinese internet stocks are not stellar earners at this time. That is precisely why they have become attractive, "at this time". It is presumed that as the fast growing chinese search market grows so will earnings in native search companies. Large US internet players have been unable to effectively penetrate the chinese search market by themselves. In order for the large media companies to grow in the region they are finding it imperative adapt to the chinese culture. The fastest way for many of them is to partner or buy an existing chinese player. We believe that BIDU will benefit from this speculation. At the moment valuation concerns are front and center, but as mergers in the group continue so will interest in these stocks. BIDU has found support at the $76 level. If the stock reaches that level again we may add a small position to our fund. That said, the technical characteristics have weakened and will force us to consider our entry point carefully.

Two Days of Hard Selling

2005-09-14T21:38:00.000-07:00

Technical

Two days of hard selling remind investors that it's September. Both the S&P500 and nasdaq composite have fallen back to their 50 day moving averages and testing the mettle of the longs. The S&P500 closed the day at 1227.18, a hair above the 50 day line. The nasdaq did a bit worse closing at 2149, breaking through its 50 dma (2157).

In the past, September has not been friendly to investors, in part due to seasonal factors but also for technical reasons. The reality of the hurricane and its effect on earnings is settling in. Investors fear that higher energy costs are going to tax corporate earnings and consumer spending, while displacements in the region are going to disrupt business in the near term. On top of that Friday is options expiration a situtation that is adding to this week's volatility. To make matters even worse earnings warnings are likely to start next week as pressured businesses come clean ahead of earning reports. To the extent that the smart money has discounted the aforementioned earnings issues will determine the future direction of this market.

We are starting to take profits as this recent rally was good to us. That said, spiking oil prices and other hurricane affects may cut into 3rd and 4th quarter earnings but bolster late 4th and 1st quarter numbers. Provided that our Key Market Factors remain overall positive we are more likely to buy long on the dips than take profits or short new issues.

PTEN - Patterson Energy is a onshore contract oil driller. The company has been on our radar screen as it has exhibited superior fundamental characteristics and earnings growth. In addition, the stock is technically strong. We calculate intrinsic value at $54/share based on 2005 numbers and $78/shares for 2006. We are likely to add a small position as the stock dips.

Exciting Markets

2005-09-11T17:13:00.000-07:00

Technical

The market continued to rally last week on solid technical strength. On Friday the S&P500 closed at 1241 near its 52 week high of 1245 and within its recent trend channel. Nearly the same can be reported for the nasdaq composite as it closed at 2175. Resistance at 2191 exists for the tech heavy index. If the nasdaq can move above that level on higher volume I believe it will further embolden investors.

Not surprising the VIX moved lower last week falling from 13.10 to close the week at 11.98. The falling level of fear is not great news for the stock market, however, the VIX remains above its recent lows.

We are staying on course adding to positions on dips. To see the fund's current positions visit our website at www.thesmartmoneyinvestor.com.

A Word on Global Growth

It appears that global growth is accelerating. Recently, China reported their GDP grew at 9.4%. That number is in questions as many economists think that China's growth is higher. Today Japan revised their GDP number from 1.2% to 3.3%, an unexpected spike. India also continues its growth with its economy expanding at about 7%. In general the world economies are growing above recent trends, which is helping US business. However, this accelerated growth is spurring inflation worries. In the end we believe that global inflation will remain low and the expanding global economy will add to earnings growth of US companies above current analysts estimates.

Key Market Factors

Oil NYMEX (negative) - $62.75/barrel - We have taken oil off the negative minus rating we gave it prior to Katrina. Although we view higher oil prices as a negative, it was mostly due to the spike in its price. Since the hurricane has passed oil has fallen to about the level it was prior to the disaster. If the price holds here or falls we may take a more bullish stance on the economy. It seems like the market can handle $60/barrel oil provided its price stabilizes. We believe the spike in oil is demand driven and is the result of healthy global economic growth.

10yr Treasury (positive minus) - 4.18%- During the past year money started to rotate from bonds into stocks, however, that activity was muted and bonds continued to find investors. The 10yr treasury now yields about 4.18%, not a very attractive return considering the risk. Now large investors are leaving the 10yr and buying mortgage back securities, getting about a point better in return. This move into the more risky mortgage market has been underway for some time. The change may prompt 10yr treasury rates to rise since the smart money already sold 10yrs to buy mortgage backed bonds. Soon other investors will do the same and the running herd will pressure rates. For now rates are a positive force for the economy, that said, a sharp rise on the long end will negatively affect many sectors. Stay tuned as we watch this situation closely.

Earnings (positive) - 16% - At this point we believe that eps growth is preceding at a rate greater than that of the second quarter for certain sectors of the economy. Texas Instruments boosted its forecast while Intel narrowed theirs albeit because Intel is apparently having trouble maintaining enough inventory to meet demand. Earnings warnings from analysts have come in for six of ten sectors in the S&P, mostly due to increases in oil prices and interest rates. As I mentioned above global growth is accelerating and will help companies to weather higher costs. That said, we believe there will be earnings fall out this quarter. Depending on the names and size market reaction will ensue accordingly; in other words the market impact of a negative report from Walmart will affect the stock market more than that of one from Aeropostale. We continue to monitor earnings closely and have created a list of likely growers. Stay tuned as we add some of these names to our portfolio.

EBAY - We like the Ebay acquisition of Skype. We believe that Skype offers Ebay several layers of opportunity and warrants a closer look at Ebay as an investment. First, Skype's software will give Ebay the opportunity to link sellers and buyers in a new way. With Ebay integrated Skype buyers will more easily be able to discuss transactions with sellers. Fraud may be reduced as customers will be able to get a new level of feedback from sellers and visa versa. Secondly, free to very low cost international phone service will become ubiquitous world wide as Ebay gives marketing push and credibility to Skype's service. Ebay's ownership of Skype will give it the ability to push out telephone and related services to its over 200 million users worldwide. Lastly, this transaction tells us that Ebay's management is not done growing the company. Ebay's management are not caretakers of the companies assets, rather they are risk takers. They are mavericks and are continuing to find new ways to add shareholder value. We started to add Ebay back into our fund. See our website www.thesmartmoneyinvestor.com for the details.

The Smart Money Looks at New Internet Realities

2005-09-07T14:43:00.000-07:00

Technical

The S&P500 stayed above trend as investors helped it to follow through Tuesday's gains. The S&P500 ended at 1236, near its high for the day on above average volume. A new leg to this year's rally was born over the last four sessions while investors played catch up and the shorts covered. The nasdaq composite did the same since the move was broad based. The nasdaq composite climbed to 2172, at its intraday high, on just below average volume.

Since August the technical landscape of the S&P500 experienced a significant change. A new trend channel has emerged as the downside leg of August fell below that of the previous low. The upper and lower band for the S&P500 now reads 1270 and 1210 respectfully. Deviations outside these boundaries, especially on higher volume, will likely signify a change in market conditions and/or trend. A similar situation has occurred in the chart of the nasdaq composite. The new trend channel for the nasdaq ranges from 2300 to 2242. Likewise a deviation from this band would spell a change in market condition for the nasdaq.

The Smart Money Starts to Time New Internet Realities

An almost underground effort is underway in the cable industry. Cable operators have been raising prices in many areas the last few years. Quietly, slowly operators are adding fees and artfully bundling viewing packages that gaff into their patrons' budgets. Sure cable operators enjoy some inelastic demand over their competitors giving them some pricing power, but this power has not gone unnoticed. Telecom companies and other network providers are working for their fair share of the home entertainment market. IPTV is coming to an Ethernet connection near you. This is likely one reason why cable operators' share prices have remained depressed.

IPTV offers the smart money opportunities to profit. As I discussed in my last post network bandwidth must be increased if network operators and content providers are to profit from innovations in media. Obviously companies like Zhone Technologies, Cisco and Lucent are going to sell more equipment to network providers, but how about the less obvious beneficiaries. Internet search companies like Google (goog), Yahoo (yhoo) and Baidu.com (bidu) will become more than just "Super TV Guides". The opportunities exist for these and other search engines to become platforms for advertisers and content providers. For example, local television stations and video bloggers will be able to use search companies to target their offerings, helping to grow their audiences. Also, as video search technology develops viewers will use search to to find specific entertainment based on image and/or description. It is projected that these search firms will partner with content providers to sell access to entertainment. It is difficult to say exactly how customers will ultimately use IPTV aside from the obvious and there is so much more to IPTV but I don't have time to include it here. What is clear is that competition has been lacking in the area and low hanging fruit exists for many. Expect companies to begin piling on. Some smaller comapnies to watch are DaveTV and Brightcove.

We have made significant changes to the portfolio recently. You can view these changes by visiting www.thesmartmoneyinvestor.com.

BIDU - Baidu.com has seen its stock price in a basing pattern over the last few weeks, adding to its technical strength. It is clear that support exists around $76/share. Yesterday the stock broke out closing above $82. There is speculation on a couple of fronts. First, many believe that Google wants to buy the company, which makes sense. Google made a statement in its secondary filing stating that it will use the proceeds from the event to make "unspecified acquisitions". Secondly, the firm is China's most popular search site and growing. A valuation above that of its peers is warranted. NTES, a BIDU peer, has a market cap of $2.39B while at $76/share BIDU has a similar valuation. NTES operates several sites more for entertainment and information, while BIDU is a search site. Currently, a premium is put on search, making BIDU undervalued at $76/share in our opinion. Couple that with an acquisition premium and BIDU looks attractive at these levels. Our feeling is that if a Google were to buy BIDU it would be north of $4B pushing the share price above $110.
GOOG - In our estimation Google is undervalued. We currently calculate intrinsic value for the company at $533/share based on 2006 projected numbers. Further, the company has made more information available regarding its secondary offering. 17 banks have been selected to participate and investors are speculating that the offering will go smoothly. Yesterday the stock broke above its 50 day moving average, an event that signals the smart money sees the value. Best of all the market for online advertising continues to grow above estimates. To see our targets on for Google visit our website at www.thesmartmoneyinvestor.com.